slaughter and may
july 2011
Common issues in corporate recovery and
insolvency in England and Wales
Sarah Paterson, partner and Thomas Vickers,
associate
1. Issues Arising When a Company is in
Financial Difficulties
1.1 H
ow does a creditor take security over assets in
England and Wales?
Under English law, there are four types of consensual
security: the pledge; the contractual lien; the
mortgage; and the charge.
Pledge
The pledge involves the creditor taking actual or
constructive delivery or possession of the debtor’s
assets as security until the loan is repaid. A creditor
has a number of implied rights in respect of pledged
assets, the most important of which is the right to
sell the assets to meet a defaulted obligation. As the
pledge depends on possession, only assets that can be
“possessed” can be pledged. The consequence of this
is that only goods and “documentary intangibles” are
susceptible to the pledge. A documentary intangible
is a document which entitles its holder to ownership
of the asset which the document represents; a good
example of this is a negotiable security, such as a
bearer bond.
Contractual Lien
A lien is the right to retain possession of another
person’s property until that other person performs a
specific obligation. It is therefore similar to a pledge.
However, the fundamental difference between the two
is that goods subject to a lien are initially deposited
with the creditor not for the purposes of security but
for some other purpose (such as custody or repair).
Mortgage
A mortgage involves the transfer of ownership of an
asset by way of security for a debt, on the condition
that ownership will be transferred back to the debtor
on discharge of the debt. A mortgage does not require
the delivery of possession (unlike a pledge or lien) and
therefore any kind of asset, tangible or intangible, is
capable of being mortgaged.
Charge
A charge, in contrast to a mortgage, does not involve
the transfer of ownership of an asset. It is simply
the appropriation of an asset or class of assets
to the satisfaction of a debt. A charge creates an
encumbrance or “weight” which hangs on the asset
and travels with it into the hands of all third parties
(except for certain good faith purchasers). A charge
can be either fixed or floating. Under a fixed charge
an asset which is ascertained and definite (or capable
of being ascertained and defined) is appropriated to
the satisfaction of a debt immediately or upon the
borrower acquiring an interest in it.
A floating charge, on the other hand, constitutes a
deferred “appropriation” in respect of a class of assets,
including future assets, where the assets constituting
the class would by their nature be changing from
time to time and where, until an event occurs which
causes the floating charge to crystallise, the borrower
is free to dispose of and add to the assets comprised
in the class in the ordinary course of business. A good
example of such a class would be the inventory of a
retailer. When the floating charge crystallises, it fastens
on the assets then comprised in the class, effectively
becoming a fixed charge. The borrower is then unable
to deal in the assets comprised in the class.
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Common issues in corporate recovery and insolvency in England and Wales
1.2 In what circumstances might transactions
entered into whilst the company is in financial
difficulties be vulnerable to attack?
If a company enters into certain types of transaction
within specified periods before its insolvency, it is
possible that the liquidator or administrator (see
section 2.3) may be able to challenge them.
Transactions at an Undervalue
A transaction is at an undervalue if a company makes
a gift to a person or enters into a transaction on terms
where the company receives no consideration or one
which has a value which is significantly less than the
value of the consideration provided by the company.
One defence is that the transaction is entered into
in good faith for the purpose of carrying on the
company’s business and that there are reasonable
grounds for believing that it will benefit the company.
To be vulnerable, a transaction at an undervalue must
have been entered into during the period of two years
before the commencement of winding up or the
commencement of administration and the company
must have been insolvent on a cash flow or balance
sheet test (see section 2.2) at the time it entered into
the transaction or became insolvent by entering into
it. There is a presumption of insolvency if the parties
to the transaction are connected, for instance if it
is an intra-group transaction or a transaction with a
director.
Transactions Defrauding Creditors
The same undervalue definition applies in respect of
transactions defrauding creditors, although there is
no time limit between the transaction being effected
and the onset of insolvency for the transaction to
be attacked. However, the transaction must have
been entered into for the purpose of putting the
assets beyond the reach of a claimant or of otherwise
prejudicing the interests of the claimant.
Preferences
A preference is given if the company does anything
or allows anything to be done which has the effect
of putting that person in a position which, if the
company were to go into insolvent liquidation, would
be better than the position he would have been in if
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the thing had not been done. The repayment of an
unsecured debt by a customer to its bank could fall
within this wide definition. The company must have
been influenced in deciding to give the preference
by a desire to produce the preferential effect, in
order for the transaction to be vulnerable. There is
a presumption of such influence if the parties are
connected.
The period before the commencement of the winding
up or the appointment of an administrator during
which such transactions must have been entered
into for them to be vulnerable is six months for a
preference to a non-connected person and two years
to a connected person. Further, for the transaction to
be vulnerable, the company must have been insolvent
on a cash flow or balance sheet test at the time of
the transaction or as a result of entering into the
transaction. If a transaction is established as being at
an undervalue or a preference, the court has very wide
powers to put the parties back into the position they
were in before the transaction was entered into.
Floating Charges
A floating charge may be invalid if it is created within
two years of the commencement of the winding up
or the appointment of an administrator if the parties
are connected or one year if they are not. There is
a defence that the company was solvent when the
charge was created (on a balance sheet and cash flow
test) and did not become insolvent as a consequence
of the transaction, but this solvency test will not apply
if the parties are connected. The charge will, however,
be valid to the extent of the value of so much of the
consideration for the charge as consists of money
paid or goods or services supplied to the company at
the same time as or after and in consideration of the
creation of the charge, together with interest, if any,
payable under the relevant agreement.
1.3 What are the liabilities of directors (in particular
civil, criminal or disqualification) for continuing
to trade whilst a company is in financial
difficulties in England and Wales?
Whilst a company is trading solvently, the Companies
Act 2006 provides that the primary duty of the directors
is to act in a way that they consider, in good faith, would
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Common issues in corporate recovery and insolvency in England and Wales
be most likely to promote the success of the company
for the benefit of its members as a whole.
granting a preference or entering into a transaction at
an undervalue (see section 1.2).
However, this duty is subject to any enactment or rule
of law requiring directors, in certain circumstances,
to consider or act in the interests of creditors of the
company. Whilst a company is clearly solvent there
is no duty to consider creditors’ interests. However,
when a company is insolvent, directors must consider
creditors’ interests before those of shareholders.
Between these two points there is a grey area, and it
is unclear precisely at what point, and to what extent,
the directors’ duty to promote the success of the
company for the benefit of its members is displaced by
a duty to act in the interests of creditors.
Fraudulent Trading
A court, on application by a liquidator in a winding up,
can order that any person who was knowingly a party
to carrying on the business of a company with intent
to defraud creditors or any other person, or for any
fraudulent purpose, be liable to make such contribution
(if any) to the company’s assets as the court thinks
proper. Liability may attach to persons who are not
directors of the company but have been involved in
the fraud, for example a company which assisted the
insolvent company in perpetrating the fraud.
Numerous duties are placed upon directors in these
situations. A breach of these duties can lead to
personal liability and possible disqualification from
being able to act as a director or being involved in the
management of the company for a specified period.
Common Law and Statutory Duties
Under common law, a director has a duty to act in the
interests of creditors when a company is insolvent or
of doubtful solvency, with a view to minimising the
loss to the creditors of the company.
Under the Insolvency Act 1986, if in the course of a
winding up anyone who has been involved with the
promotion, formation or management of the company
is found to have misapplied, retained or become
accountable for any money or other property of the
company, or been guilty of misfeasance or breach of
a fiduciary or other duty in relation to the company,
a court may on an application by the official receiver,
liquidator or a creditor compel him to:
a) repay, restore or account for the money or
property of the company with interest; or
b) contribute such sum to the company’s assets
by way of compensation in respect of the
misfeasance or breach of fiduciary duty or other
duty as the court thinks just.
Breaches of duty which could be relevant here would
include a director’s involvement in the company
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Fraudulent trading is also a criminal offence carrying
with it the threat of a fine, imprisonment or both.
Such an offence may apply whether or not the
company has been, or is in the course of being, wound
up. Fraudulent trading can arise when directors of
a company allow it to incur credit when they know
there is no good reason for thinking that funds will be
available to repay the relevant debt when it becomes
due or shortly thereafter.
Wrongful Trading
A court, on application by a liquidator in a winding
up, can order that a director of a company which has
gone into insolvent liquidation is liable to make such
contribution (if any) to the company’s assets as the
court thinks proper if:
a) before the commencement of the winding up,
the director knew or ought to have concluded
that there was no reasonable prospect that
the company would avoid going into insolvent
liquidation; and
b) thereafter the director failed to take every step
with a view to minimising the potential loss to the
company’s creditors which he ought to have taken.
The standard required as to what a director ought
to know, the conclusions he ought to reach and
the steps he ought to take is the standard of what
would be known, reached or taken by a reasonably
diligent person with the general knowledge, skill
and experience that may reasonably be expected of
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Common issues in corporate recovery and insolvency in England and Wales
a person carrying out the same functions as those
of the director in relation to the company and with
the general knowledge, skill and experience that the
director has.
Disqualification
Apart from personal liability, where a director engages
in fraudulent or wrongful trading or has been found
guilty of other misconduct in connection with a
company and is held to be unfit by the court, he may
be disqualified by court order for a period of between
two and fifteen years from acting as a director or from
having any involvement in the promotion, formation
or management of any company.
2. Formal Procedures
2.1 What are the main types of formal procedures
available for companies in financial difficulties in
England and Wales?
When a company is in financial difficulties there are
five formal procedures which may apply:
a) a company voluntary arrangement (“CVA”) may
be entered into between the company and its
creditors;
b) a scheme of arrangement may be effected;
be used in a reorganisation or rescheduling of debt.
Receivership and liquidation, in contrast, are likely
to signal an acknowledgement that the company
itself has no future and all that can be sought is
the maximisation of the proceeds of the sale of the
company’s assets or business. This may enable a
purchaser to acquire at least part of its business as
a going concern, thereby preserving the underlying
business and employment. In contrast to receivership
and liquidation, the first purpose of the administration
regime is to act as a rescue mechanism in respect of
those companies which are capable of rescue.
2.2What are the tests for insolvency in England and
Wales?
English law does not use “insolvency” as a defined
term. The relevant test is “inability to pay debts”.
Therefore, for the purposes of English law, a company
is insolvent if it is unable to pay its debts. English law
does not have a single definition of inability to pay
debts. The two principal tests are known as the ‘cash
flow’ and the ‘balance sheet’ tests. The cash flow test
applies if a company is unable to pay its debts as they
fall due. The balance sheet test is satisfied if the value
of the company’s assets is less than the amount of
its liabilities, taking into account its prospective and
contingent liabilities.
2.3On what grounds can the company be placed
into each procedure?
c) an administrator may be appointed;
d) an administrative receiver or receiver may be
appointed; or
e) the company may go into liquidation (otherwise
known as winding up). There are two types
of liquidation: compulsory and voluntary. A
compulsory liquidation is a court-based procedure
and applies to insolvent companies. A voluntary
liquidation can either be a members’ voluntary
liquidation (“MVL”), which applies to solvent
companies, or a creditors’ voluntary liquidation
(“CVL”), which applies to insolvent companies.
In general terms voluntary arrangements and schemes
of arrangement are restructuring tools which may
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Company Voluntary Arrangement / Scheme of
Arrangement
There are no formal requirements that a company has
to satisfy in order to be placed into either of these
procedures. There is therefore no requirement that the
company in question is unable to pay its debts before
it can utilise either procedure.
Administration
A holder of a qualifying floating charge (which is
defined as being a floating charge over the whole or
substantially the whole of the company’s property)
is able to appoint an administrator either in or out
of court (see below) at any time when an event
has occurred which would allow him to enforce his
charge (this will typically be some default under the
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Common issues in corporate recovery and insolvency in England and Wales
loan agreement). This right of appointment may well
arise when the company is not insolvent. In all other
circumstances in which an administrator is appointed,
it will be necessary to show that the company is or is
likely to become unable to pay its debts.
Administrative Receivership / Receivership
An administrative receiver is a manager of the whole
or substantially the whole of the debtor’s assets
which have been secured by a debenture creating
fixed and floating charges. He will be appointed by
the debenture-holder, on the default of the debtor,
primarily to take control of and dispose of sufficient of
the assets to cover payment of the amounts due under
the debenture. His role is to be distinguished from
that of a receiver of particular assets, appointed by a
secured creditor under a fixed charge. Such a receiver
has limited powers in respect of the property over
which he is appointed and pays the proceeds of the
property to the holder of the fixed charge.
The Enterprise Act 2002 introduced a prohibition
on the appointment of an administrative receiver
except in limited circumstances. Thus, where a charge
is entered into on or after 15 September 2003 it will
only be possible to appoint an administrative receiver
where the company granting the charge falls into an
exception to the prohibition. The exceptions include
capital markets transactions (such as securitisations),
companies which trade on the financial markets and
companies involved in public-private partnership and
utilities projects. Floating charges entered into before
15 September 2003 are not subject to the prohibition.
Liquidation
Compulsory Liquidation
A compulsory winding up order is made by the court.
The grounds on which a court can make a winding
up order include the company being unable to pay
its debts and where the court believes it is just and
equitable that the company be wound up. For the
purposes of liquidation, the company is unable to
pay its debts if it fails either of the cash flow or the
balance sheet tests. In addition, a company is deemed
to be unable to pay its debts if: (a) a creditor who
is owed over £750 has served the company with a
written demand for payment and the company has for
three weeks either not paid the sum, not secured the
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sum, or not compounded the sum to the reasonable
satisfaction of the creditor; or (b) if an order of the
court requiring the company to pay a certain sum to a
creditor is not satisfied.
Voluntary Liquidation
There are two types of voluntary winding up: a
“members’ winding up” and a “creditors’ winding
up”. A members’ voluntary winding up is a solvent
liquidation which is under the control of the
company’s shareholders (also known as its members),
and is only possible where the directors are able
to make a declaration that all the liabilities of the
company will be met within a period not exceeding
twelve months. If the directors cannot make this
declaration, then it will be a creditors’ winding up and
control of the liquidation will pass to the creditors.
2.4Please describe briefly how the company is
placed into each procedure.
Company Voluntary Arrangement
The directors (or, if the company is in administration
or liquidation, the administrator or liquidator) may
propose to the shareholders and unsecured creditors
a composition in satisfaction of the company’s debts
or a scheme of arrangement of its affairs. A person
authorised to act as the “nominee”, currently a
licensed insolvency practitioner (a professional with
insolvency experience, normally an accountant),
reports to the court as to whether, in his opinion, the
proposal should be put to shareholders and creditors.
If he believes the proposal should be put, meetings of
shareholders and creditors are called to approve the
proposal. Approval requires a simple majority at the
shareholders’ meeting and a majority of three-quarters
or more (by value) at the creditors’ meeting (subject
to the exclusion of secured creditors and certain other
limitations concerning, for example, creditors who
are connected with the company). A proposal, once
approved, may be challenged on the grounds that
there was some material irregularity in connection
with the holding of the meetings, or that it unfairly
prejudices the interests of any creditor.
Scheme of Arrangement
A company (or an administrator or liquidator) or
any creditor or shareholder of a company may
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petition the court to summon a meeting of creditors
or shareholders to agree to a compromise or
arrangement between the company and its creditors
or shareholders. If a simple majority in number of
those voting and a three-quarters majority in value is
obtained at any meeting, and if the court sanctions the
compromise or arrangement, then it will be binding
on the company and the creditors or the shareholders.
To secure approval of a scheme, each separate class of
creditors must vote in favour.
Administration
An administrator may be appointed either by
application to the court or by filing papers with the
court documenting an out of court appointment. An
out of court appointment may be made by a qualifying
floating charge holder (“QFC holder”), the company
or its directors. An application to court to appoint
an administrator may be made by the company,
its directors or any creditor. The grounds upon
which a company can be placed in administration
are described in section 2.3 above. In all cases, an
insolvency practitioner’s opinion that the purpose
of the administration is capable of being achieved
must be provided. All administrations share the same
purpose which is set out as a cascade of objectives. The
first objective is the rescue of the company as a going
concern. Only if this is not reasonably practicable or
there would be a better result for the creditors as a
whole does the second objective apply. The second
objective is to achieve a better result for the creditors
as a whole than would be likely if the company were
wound up without first being in administration. Only if
the second objective is not reasonably practicable does
the third objective of realising the company’s property
for the benefit of one or more secured or preferential
creditors apply.
Where an administrative receiver is in office, the
appointment of an administrator must be made
by an application to the court. The court will only
make an appointment where the appointor of the
administrative receiver consents or where the court
thinks that the security under which the administrative
receiver was appointed is liable to be released or
discharged as a preference or a transaction at an
undervalue or that the floating charge is voidable for
want of new consideration at the time of its creation.
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Where a secured creditor retains the right to appoint
an administrative receiver he may use this right
to block the appointment of an administrator by
appointing an administrative receiver prior to the
appointment of an administrator. A person appointing
an administrator must give notice to any person who
may be entitled to appoint an administrative receiver
or administrator as the holder of a qualifying floating
charge. During the notice period, a secured creditor
who retains the right to appoint an administrative
receiver may do so or may instead substitute his
choice of insolvency practitioner as administrator. A
QFC holder who does not have the power to appoint
an administrative receiver may substitute his choice of
insolvency practitioner as administrator even though
he cannot block the appointment of an administrator.
Administrative Receiver
There is no formal appointment procedure for an
administrative receiver. When the grounds upon
which an administrative receiver may be appointed
arise, the secured creditor may elect to make an
appointment. The administrative receiver must accept
the appointment either orally or in writing.
Liquidation
Compulsory Liquidation
A company enters compulsory liquidation through an
order made by the court. Proceedings are started by
a petition that may be presented by a creditor, the
company, the directors or any contributory. Receivers
and administrators are also able to present petitions.
If the court is satisfied that the grounds are satisfied,
then it will make a winding up order. The Official
Receiver (a civil servant in the Insolvency Service) then
automatically assumes the role of the liquidator until
another liquidator is appointed.
Voluntary Liquidation
A voluntary liquidation (whether creditors’ or
members’) is initiated by the company’s members
passing a resolution (requiring a three-quarters
majority vote) which must either state that they are
in favour of a voluntary liquidation (in the case of a
members’ voluntary liquidation), or that the company
cannot, by reason of its liabilities, continue its business
and that it is advisable to wind it up (in the case of
a creditors’ voluntary liquidation). The voluntary
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liquidation commences on the date the resolution
is passed. In a members’ voluntary liquidation,
the shareholders appoint the liquidator, while in a
creditors’ voluntary liquidation, the creditors appoint
him. If, during the course of a members’ voluntary
winding up, the liquidator forms the opinion that
the company will be unable to pay its debts in full,
together with any interest, the liquidation will be
converted from a members’ voluntary winding up to a
creditors’ voluntary winding up.
2.5What notifications, meetings and publications
are required after the company has been placed
into each procedure?
Company Voluntary Arrangement
The chairman must prepare a report of the creditors’
meeting for the court, which must be filed within four
business days of the meeting being held. Notice of the
result of the meeting must be given to the creditors
immediately after the report is filed in court. Notice
must also be sent to the registrar of companies (a
governmental body controlling the incorporation and
administration of companies operating in England
and Wales which maintains a register of companies
available for public inspection), but only if the decision
was to approve the voluntary arrangement. Thereafter
the supervisor must circulate annual reports setting
out the progress made and prospects for the successful
implementation of the CVA. The reports must be sent
to all creditors bound by the CVA, the company itself,
the registrar of companies, and the auditors (unless
the company is in liquidation) and the members.
Scheme of Arrangement
Once the court order is made approving the scheme,
it is drawn up and an original, together with an official
copy, is obtained by the company. The official copy
is then delivered to the registrar of companies for
registration and it is that filing process which makes
the scheme effective and binding.
Administration
As soon as reasonably practicable after his
appointment, the administrator must notify the
company and all of its creditors of his appointment.
The appointment must also be advertised in the
London Gazette (which is the official newspaper
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of record in England and Wales) and in such other
ways as the administrator sees fit. The administrator
must also send a notice of his appointment to the
registrar of companies. Following the appointment
of the administrator, the directors are required to
provide him with a statement of the company’s
affairs, enabling him to assess the current position
of the company and formulate his proposals for the
company. The administrator must send a statement
of his proposals to all creditors and members of the
company within eight weeks of his appointment, and
also file a copy of the proposals with the registrar
of companies. An invitation to an initial creditors’
meeting, to be held as soon as reasonably practicable,
will be included with the copy of the administrator’s
proposals sent to each creditor. At the initial creditors’
meeting, the administrator presents his proposals to
the creditors. The creditors can accept the proposals,
with or without modifications, by way of a majority
vote (by value) of claims. If they reject the proposals,
the administrator must report to court and seek
directions. Further creditors’ meetings are required if
the administrator revises his proposals or if one tenth
of the creditors (in value) demand it. Otherwise, the
administrator will implement the approved proposals.
The administrator must send six monthly progress
reports to the creditors and the registrar of companies,
the initial six month period commencing on the date
the company entered administration.
Administrative Receivership
On appointment, the administrative receiver must
send notice of his appointment to the company
immediately and to all known creditors within 28 days.
The notice must be advertised in the London Gazette
and in such other ways as the administrative receiver
sees fit. Every invoice, order for goods or business letter
issued by the company must contain a statement
that a receiver has been appointed. Following the
appointment of the administrative receiver, the
directors (together with any others involved in the
company if required by the administrative receiver)
must prepare a statement of affairs of the company
for the administrative receiver. Within three months of
his appointment the administrative receiver is required
to send a report to the registrar of companies and to
creditors, together with a summary of the directors’
statement and his comments on it. The administrative
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receiver must then call a meeting of the unsecured
creditors to consider his report.
Liquidation
Compulsory Liquidation
In a compulsory liquidation, the Official Receiver is
required to advertise the liquidation in the London
Gazette and in such other ways as he sees fit. The
company must notify the registrar of companies. From
this point on, it is a requirement that all company
papers state that the company is in liquidation.
Within twelve weeks of the winding up order being
made, the Official Receiver must decide whether to
call meetings of the creditors and contributories to
appoint a licensed insolvency practitioner to act as
liquidator. If he decides not to call meetings, he must
give notice of his decision before the end of the twelve
week period to the court and the company’s creditors
and contributories. If he decides that meetings should
be called, they must be held not more than four
months from the date of the winding up order, and
14 days’ notice must be given to all creditors and
contributories. In addition, he must call a meeting if
requested at any time by one tenth in value of the
company’s creditors.
Members’ Voluntary Liquidation
The directors’ statutory declaration of solvency
and the special resolution to wind up the company
must be filed with the registrar of companies within
15 days of the resolution being passed. In addition,
within 14 days of passing a resolution for voluntary
liquidation, the liquidator must publish a notice of his
appointment in the London Gazette and advertise the
liquidation in such other ways as he sees fit. He must
also file notice of his appointment with the registrar of
companies.
The liquidator must send annual progress reports to
members and the registrar of companies, starting on
the date that he was appointed. A final report must be
laid before the final meeting of creditors.
A final meeting of the members is held prior to
dissolution (at which point the company’s formal
existence is terminated). This meeting is called by
advertisement in the London Gazette on one month’s
notice. The liquidator will lay before the meeting
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an account of how the liquidation was conducted.
Within one week of this final meeting, the liquidator is
required to send a copy of this account to the registrar
of companies, and must file a final return with the
registrar of companies with respect to the holding of
the final meeting and its date.
Creditors’ Voluntary Liquidation
The requirements for giving notice of and advertising
the liquidator’s appointment are the same as those
for a members’ voluntary liquidation. A meeting
of the creditors must be held within 14 days of the
general meeting passing the resolution to wind up the
company. At least seven days’ notice of the creditors’
meeting must be given to the creditors by post, and
a notice advertising the creditors’ meeting must be
placed in the London Gazette and at least two local
newspapers. Before the meeting is held, creditors are
entitled to inspect a list of names and addresses of
the company’s creditors. The directors must produce a
full statement of the company’s affairs, which has to
be presented at the creditors’ meeting. The statement
should include details of the company’s assets,
debts and liabilities, the names and addresses of the
company’s creditors and details of the security held by
them. Details of the appointment, the shareholders’
resolution putting the company into liquidation and
the statement of affairs must be filed with the registrar
of companies. The shareholders’ resolution must also
be published in the London Gazette. As for compulsory
liquidation, the liquidator must send annual progress
reports to members, creditors, and the registrar of
companies, the initial annual period commencing
on the day he was appointed. The final meeting of
creditors in a creditors’ voluntary liquidation follows
the same requirements and procedures as that for a
members’ voluntary liquidation.
3. Creditors
3.1 Are unsecured creditors free to enforce their
rights in each procedure?
Company Voluntary Arrangement
If a CVA is approved, it binds all creditors who would
have been entitled to vote, whether or not they had
notice of the creditors’ meeting. The arrangement
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can be challenged, however, if it unfairly prejudices
the interests of a creditor or shareholder of the
company or there has been a material irregularity at
or in relation to the meetings. Since January 2003,
there has been provision for an optional moratorium
on legal processes for small companies, including the
enforcement of security, of between one and three
months for an eligible company contemplating a
voluntary arrangement. Eligibility for the moratorium
is principally determined by reference to the
definition of a small company under the Companies
Act 2006. A company will fall within the definition
of a small company if it satisfies two or more of the
following requirements in the year ending with the
date it files for the CVA moratorium or in the last
financial year of the company ending before that
date:
Turnover
Not more than £6.5 million
Balance Sheet Total
Not more than £3.26 million
Number of Employees Not more than 50
A special purpose vehicle in a securitisation or other
financial structure may fall within the definition
of small company. However, the statute contains
exclusions from eligibility for companies involved in
certain financial transactions.
Scheme of Arrangement
If a scheme of arrangement is sanctioned by the
court, it may alter the rights of shareholders and
creditors of the company, even where certain
shareholders and creditors have not themselves
voted in favour. The voting procedure requires each
‘class’ of creditors to be given a separate vote. If any
one class of creditors fails to vote in favour of the
scheme, then the scheme will fail. However, as there
is no moratorium available with this procedure, there
is nothing to prevent creditors taking enforcement
action against the company up until the point at
which the scheme is sanctioned.
Administration
Once an application to court to appoint an
administrator has been lodged or notice of intention
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to make an appointment out of court has been given
an interim moratorium automatically arises, the
purpose of which is to protect the company and its
assets from creditor action in the short period until
an administrator is appointed. During that period, no
steps may be taken to enforce security or repossess
goods held under leasing, hire purchase, conditional
sale or retention of title agreements, no landlord may
exercise a right of forfeiture in relation to premises
let to the company and no legal process may be
commenced or continued without the consent of the
administrator or the leave of the court. However, a
QFC holder may appoint an out of court administrator
or an administrative receiver and a petition to
wind up the company may still be presented. If an
administrator is appointed, the moratorium will
continue unless the administrator or the court agrees
otherwise.
Administrative Receivership
The appointment of an administrative receiver does
not create an automatic moratorium. The creditors
may therefore begin or continue legal actions against
the company, including petitioning for its liquidation,
whilst the company is in administrative receivership.
An important consequence of this is that landlords
may be able to exercise their right to forfeit the lease
of the company’s premises.
Liquidation
The main function of a liquidator is to collect in
and distribute the assets of the company amongst
the company’s creditors in accordance with a strict
hierarchy of priorities (see section 5.2). Unsecured
creditors occupy the lowest position in the hierarchy,
ranking only above the shareholders of the company.
They have no freedom to enforce their rights under
a liquidation although they are entitled to repossess
assets (such as goods subject to a retention of
title clause) which are not actually owned by the
company.
3.2Can secured creditors enforce their security in
each procedure?
See section 3.1 for details on rights of enforcement in
relation to schemes of arrangement, administration
and administrative receivership.
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Company Voluntary Arrangement
An important limitation on the CVA mechanism is that
a CVA may not affect the rights of secured creditors
of the company to enforce their security, except with
their consent.
Liquidation
In a liquidation, secured creditors have several options
in respect of their security. The first option is to enforce
their security. If the value of the security exceeds
the value of the debt which they are owed, they will
make a full recovery and the balance will form part
of the assets of the company to be distributed by the
liquidator. If the value of the security is less than the
value of the debt, then the secured creditor will recover
the value of the security and will rank as an unsecured
creditor for the balance of the sum owed to him. The
second option is for the secured creditor to value his
security and allow the liquidator to realise it for him.
The final option is for the secured creditor to surrender
his security for the general benefit of the creditors and
to rank as an unsecured creditor in respect of the debt
owed to him.
3.3Can creditors set off sums owed by them to the
company against amounts owed by the company
to them in each procedure?
Insolvency law makes no special provisions for the
application of set-off in administrative receiverships,
company voluntary arrangements and schemes of
arrangement.
Liquidation
Under the Insolvency Rules 1986, mandatory set-off
applies in circumstances in which, before a company
goes into liquidation, there have been mutual credits,
mutual debts or other mutual dealings between the
company and any creditor of the company proving
or claiming to prove for a debt in the liquidation. In
such circumstances, the sums due from one party are
set off against the sums due from the other party.
Only the balance, if any, is provable in the liquidation
or, as the case may be, payable to the liquidator.
However, sums due from the company to another
party shall not be included in the account if that
party had notice at the time that they became due
that: (i) a meeting of creditors had been summoned;
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(ii) a petition for the winding up of the company was
pending; (iii) an application for an administration order
was pending; or (iv) any person had given notice of
intention to appoint an administrator. In this context,
a sum is “due” if it is payable at present or in the
future, the obligation by which it is payable is certain
or contingent or its amount is fixed or liquidated (or
is capable of being ascertained by fixed rules or as a
matter of opinion).
Administration
Set-off will only apply in an administration if the
administrator has given notice that he intends to make
a distribution to creditors. Prior to the giving of such
notice by the administrator, normal rights of set-off can
still be exercised. Once notice of intention to distribute
has been given by the administrator, an account must
be taken of what is due from each party to the other in
respect of their mutual dealings, and the sums due from
one party must be set off against the sums due from the
other on a similar basis to that of a liquidation. This does
not affect debts that have already been validly set off
before the notice was given.
4. Continuing the Business
4.1 Who controls the company in each procedure? In
particular, please describe briefly the effect of the
procedures on directors and shareholders.
Company Voluntary Arrangement
If a proposal for a CVA is approved, it is normally
implemented under the supervision of the nominee,
who then becomes known as the “supervisor”. The
nature of his role will depend on the terms of the
CVA. Following approval of the arrangement, the
directors of the company will retain their positions
but are obliged to do everything possible to put the
relevant assets of the company into the hands of
the supervisor. The rights of shareholders under the
approved arrangement will not be affected by the CVA
unless it involves some alteration of their rights, for
example in a debt-for-equity swap.
Scheme of Arrangement
A defining feature of a scheme of arrangement is
the fact that the incumbent management remains
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in control of the company and no reliance is placed
upon an independent insolvency practitioner.
Consequently, the directors of the company retain
their positions. A scheme of arrangement does not
necessarily affect the rights of shareholders. It will
only do so to the extent that their rights are modified
by the scheme itself.
Administration
Upon appointment, the administrator manages the
affairs, business and property of the company as
its agent. The directors continue to hold office but
cannot exercise any management powers without the
administrator’s consent. The power of the shareholders
to control the company ceases. The administrator is
endowed with wide-ranging powers. These have the
effect of allowing him to take control of the company’s
assets, prepare proposals for the approval of the
creditors, and to then carry out those proposals.
Administrative Receivership
An administrative receiver is appointed to manage the
whole (or substantially the whole) of the company’s
property. Accordingly, the company is under his
control and his appointment leads to the suspension
of the directors’ powers of management. His primary
duty is owed to the secured lender who appointed him
to seek repayment of the secured debt. The powers
and rights of the company’s shareholders are generally
also suspended.
Liquidation
On a winding up, the liquidator has wide-ranging
powers which allow him to collect in and distribute
the assets of the company. His appointment, whether
on a compulsory or voluntary liquidation, leads to the
termination of the powers of the directors. The rights
of the shareholders, for all intents and purposes, also
lapse.
4.2How does the company finance these
procedures?
A full review of the ways in which the procedures are
financed is outside the scope of a general introduction.
In general, to the extent officeholders require further
funding they will typically look to the company’s
existing lenders to provide it.
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4.3What is the effect of each procedure on
employees?
Company Voluntary Arrangement / Scheme of
Arrangement
When a CVA is approved, or a scheme of arrangement
is sanctioned, there is no direct impact upon the
employees of the company. It may well be that
the consequence of the implementation of an
arrangement may have an effect upon the company’s
employees; however, this effect would be a
consequence of the terms of the arrangement itself.
Administration
Since the main function of an administrator is to
rescue the company as a going concern, there is no
automatic termination of employment contracts on
appointment. Administrators do, though, have the
power to dismiss employees if their employment
contracts are inconsistent with the administrator
running the business. If employees are dismissed, this
may give rise to an employment claim against the
company.
The onset of administration does not therefore
necessarily affect employees, unless their contracts
are terminated or where the business of the company
is sold. In the latter case, the operation of the
Transfer of Undertakings (Protection of Employment)
Regulations 2006 (“TUPE”) may apply to protect the
position of the employees. It should be noted that
the interpretation of TUPE is not straightforward, and
some difficult issues in relation to its precise scope
remain to be resolved.
Administrators are not personally responsible for
liabilities arising under employment contracts.
However, if employment contracts of existing
employees have been “adopted” by the administrator,
then certain liabilities (principally salary – including
holiday pay, sick pay and pension contributions)
which arise under such contracts during the
administration are payable in priority to payment of
the administrator’s fees and expenses and any floating
charge security.
An administrator will have adopted a contract of
employment if he continues to employ staff and pay
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them in accordance with their previous contracts for
14 days after his appointment.
If the administrator sells the business of the company,
then TUPE may apply. If TUPE does apply, then the
most important effect of this is that the purchaser
of the business must take on the employees of the
business on the same terms as they were previously
employed; however, certain changes can be made
to the contracts of employment of the affected
employees if those changes are made with the
intention of safeguarding employment by ensuring
the survival of the business. These variations must be
agreed with an employee representative.
Administrative Receivership
The position of employees in an administrative
receivership is generally the same as for an
administration.
Liquidation
On a compulsory liquidation the service contracts
of employees are automatically terminated, and
employment claims may arise against the company as
a result.
The commencement of a voluntary liquidation, in
contrast, does not automatically terminate the service
contracts of employees. It may therefore be open to
the liquidator to carry on the business of the company
until he can sell some or all of its undertaking. If
this does occur, then TUPE may apply, although the
effects of its application might differ from those on an
administration.
4.4What effect does the commencement of any
procedure have on contracts with the company
and can the company terminate contracts during
each procedure?
Company Voluntary Arrangement / Scheme of
Arrangement
The effects of a CVA or a scheme of arrangement
depend entirely upon its terms. The default position is
that neither procedure automatically interferes with
the contracts of the company.
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Administration
Entering into administration does not have any
automatic effect on company contracts, which
continue in effect. The administrator is given no power
(unlike a liquidator) to disclaim “onerous” contracts.
The administration moratorium does not prevent
counterparties cancelling contracts with the company.
It is a typical term of many contracts that the contract
in question may be terminated upon the company
entering into an insolvency procedure, such as
administration. The administrator therefore may need
to negotiate with the key suppliers and customers of
the company if he wishes to enable the company to
continue trading. There is, however, a critical exception
to the general principle: the moratorium prevents
landlords from forfeiting company leases.
Administrative Receivership
The treatment of company contracts during an
administrative receivership is broadly similar to their
treatment under an administration. The position
is thus that the appointment of an administrative
receiver does not terminate or affect company
contracts unless provided for in the contract itself.
Liquidation
The onset of liquidation does not automatically
terminate company contracts (although liquidation
may be a ground for termination under the terms of
certain contracts). However, unlike in administration
and administrative receivership, the liquidator is given
the power to unilaterally terminate onerous contracts
in order to facilitate the winding up of the affairs of the
company. This power is known as the right to disclaim
onerous property.
If the disclaimer is available, the effect of it is to
terminate the contract as at the date of the disclaimer,
so that the respective rights and obligations of the
company and its counterparty are fixed as at that
date. The disclaimer therefore allows the company to
avoid incurring future liabilities. However, it has no
effect on liabilities that have already accrued. If the
counterparty suffers loss as a result of a disclaimer,
it may claim for such loss in the winding up. This loss
will be calculated under the normal principles used to
assess loss for breach of contract..
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5. Claims
5.1 Broadly, how do creditors claim amounts owed
to them in each procedure?
Company Voluntary Arrangement / Scheme of
Arrangement
The operation of these procedures depends upon their
actual terms. Accordingly, the mechanism by which
creditors seek payment of sums owed to them will
vary according to the terms of each arrangement.
Administration
The Enterprise Act 2002 introduced provisions giving
an administrator power to make distributions. He
may distribute to secured and preferential creditors
subject to the normal rules of priority and may make
a distribution to unsecured creditors with court
sanction. Before receiving a distribution the creditor
must submit a statement of claim to the administrator
to “prove” for his debt. The process for proving is
similar to that described for liquidation below. An
administrator also has a general power to make
payments to unsecured creditors where such payments
are necessary or incidental to the performance of
his functions. This means that an unsecured creditor
whose supplies are essential to the administration may
be able to press for payment of pre-administration
debts as a condition of further supply.
Administrative Receivership
The principal duty of the administrative receiver is
to secure the repayment of the debt owed by the
company to the secured creditor who appointed
him. This is combined with a limited duty of care
to the company, together with a statutory duty to
preferential creditors (see section 5.2). The receiver
does not owe a separate duty to the general body
of unsecured creditors. There is no method by which
creditors, other than the secured creditor who made
the appointment, can claim amounts owed to them
in an administrative receivership. If the general body
of creditors are to be paid, then it will not be through
administrative receivership. Their claims will either be
met by the company itself, if the company emerges
from receivership with a viable business after the
receiver has repaid the appointing secured creditor, or
(and more likely) in a liquidation.
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Liquidation
A creditor wishing to claim in a liquidation must
“prove” his debt. To do so, the creditor must submit
a formal claim to the liquidator, which is known as
a proof of debt. The liquidator is obliged to send
forms of proof to every creditor of the company who
is known to him. Creditors are entitled to submit
proofs in respect of any type of claim, whether it is
present or future, certain or contingent, liquidated
or unascertained. The liquidator must then examine
every proof he receives, and either admit it, reject
it (giving his reasons in writing to the person
concerned), or request further information. As
regards debts that are contingent or of an uncertain
value, the liquidator should estimate a value, which
may subsequently be revised as further information
comes to light. If a creditor is unhappy with a
liquidator’s decision he may apply to court for a
review of the decision. It is only claims which have
been proved that may form part of any payment
(which is technically known as a “dividend”) made by
the liquidator.
5.2What is the ranking of claims in each procedure?
In particular, do any specific types of claim have
preferential status?
Company Voluntary Arrangement / Scheme of
Arrangement
Where a distribution is made pursuant to a CVA or
a scheme of arrangement, the terms on which it will
be made will be governed by the arrangement itself,
which the creditors will have voted on and approved
by the requisite majorities. Accordingly, there is no
general rule which applies to the ranking of claims in
these procedures. It is important to note that a CVA
cannot affect the rights of preferential creditors or of
secured creditors without their consent.
Administration
On an administration, the order of priorities is broadly
as follows:
a) the administrator’s costs and expenses of realising
fixed charge assets;
b) fixed charge holders (to the extent of their
security);
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c) the obligations incurred under “new” contracts
and the pay of employees whose contracts have
been adopted;
Liquidation
The order of priorities on liquidation is broadly the
same as for an administration.
d) the general expenses and costs of administration;
5.3Are tax liabilities incurred during each procedure?
e) preferential creditors (preferential debts now relate
almost exclusively to employees’ rights, including
accrued pay and pension rights);
Company Voluntary Arrangement
The entry of a company into a CVA does not, of itself,
affect the corporation tax liabilities of the company
(save to the extent that previously accrued tax
liabilities are compromised by the arrangement itself).
Tax arising on disposals of assets, or on income earned
during the course of the arrangement, will be a liability
of the company in the normal way.
f) floating charge holders (subject to the “prescribed
part provision”, which is explained in more detail
below);
g) unsecured creditors; and
h) shareholders.
The prescribed part provision was introduced by the
Enterprise Act 2002, and was intended to ensure
a fairer distribution of the assets of an insolvent
company for the benefit of its unsecured creditors.
Under the old regime, floating charge holders were
paid in full before any sums were payable to the
unsecured creditors. Now, the administrator is obliged
to set aside a certain amount of money from the “net
property” of the company to pay unsecured creditors.
Net property is defined as all the property of the
company remaining after the payment of fixed charge
liabilities, preferential debts and the administrator’s
costs of realising assets. The prescribed part is then
calculated as being 50% of the first £10,000 in
value of net property, and 20% of net property
thereafter, up to a maximum of £600,000. Floating
charge holders whose charges were created before 15
September, 2003 are not subject to the prescribed
part provisions.
Administrative Receivership
As described in section 5.1, an administrative receiver
takes possession of the secured assets with a view to
realising their value and applying it to pay the amounts
due to the secured creditor which appointed him.
Creditors with fixed charges and preferential debts will
be paid in priority to creditors with floating charge
security.
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On the release of a debt, whether a trade debt or a
loan, a company debtor will normally be taxed on the
amount released. It is an attractive feature of the CVA
regime that the release of a debt pursuant to such
an arrangement does not give rise to a receipt for tax
purposes.
Scheme of Arrangement
The tax treatment of a company entering into a
scheme of arrangement is broadly the same as on a
CVA.
Administrative Receivership
The appointment of an administrative receiver does
not, of itself, affect the liability of a company to tax,
which continues to be computed on the same basis as
before unless and until the company ceases to trade. In
general terms, the administrative receiver is not liable
to pay tax on profits made by the company after his
appointment, whether arising via trading income or on
the disposal of assets. In relation to chargeable gains
arising on such a disposal of assets, tax legislation
expressly treats the receiver as a nominee of the
company.
Administration
A company entering into administration continues
to be subject to tax on profits which arise during the
procedure. Whilst the liability for tax arising during
the administration remains with the company, it is
the administrator who must account for any such
tax as an expense of the administration. To ensure
that the extent of this liability is clear, the legislation
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now requires a company to commence a new
accounting period for tax purposes upon the onset of
administration.
Liquidation
Similar principles apply on a liquidation. A company
entering into winding up remains subject to tax on
profits arising during the procedure. The liquidator is
responsible for payment of any such tax which is due as
an expense of the liquidation and the commencement
of liquidation causes the company’s current tax
accounting period to end and a new one to begin.
6. Ending the Formal Procedure
6.1 Is there a process for “cramming down” creditors
who do not approve proposals put forward in
these procedures?
The two procedures best suited to achieving a “cram
down” are company voluntary arrangements and
schemes of arrangement.
This is because approval of the terms of these
arrangements depends on majority voting, the
outcome of which binds dissenting creditors as if they
had indeed agreed to the terms. However, it should
be appreciated that the scope of these procedures to
achieve a true cram down may be limited by minority
protections.
6.2What happens at the end of each procedure?
Company Voluntary Arrangement
Once the terms of a CVA have been completed
successfully, a company reverts to its former status
and control returns to its directors and shareholders.
It is possible (and this occurs frequently in practice)
that the arrangement may fail. If so, it is likely that the
company will enter into another procedure, such as
liquidation.
Scheme of Arrangement
Once a scheme is approved by the court, it is
implemented under the supervision of the company’s
directors. Once the implementation is completed, the
company reverts to its former status.
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Administration
There are several exit procedures for an administration.
They include the termination of the administration (and
the company returning to the control of its directors) if
the administrator considers that its purpose has been
achieved, or moving into winding up proceedings if he
considers that that will be the most appropriate method
to distribute the company’s assets. Provision is also
made for the administrator to dissolve the company,
thereby bringing its existence to an end, if he thinks that
the company has no assets to distribute.
Liquidation
Following the final meeting of creditors, the company
is automatically dissolved three months later.
7. Alternative Forms of Restructuring
7.1 Is it common to achieve a restructuring outside a
formal procedure in England and Wales? In what
circumstances might this be possible?
Restructuring in England and Wales can be achieved
by adopting one or a combination of non-formal
processes in order to avoid the need to realise a
company’s assets. In recent years, lenders have
become less hasty in pursuing formal insolvency routes
such as appointing an administrator, administrative
receiver or liquidator to realise a debtor’s business,
recognising that they may increase their debt recovery
if the debtor’s business is reorganised rather than
liquidated.
Furthermore, formal insolvency proceedings may
preclude debtor-in-possession restructuring. US
based holders of UK corporate bonds are increasingly
expecting restructuring outcomes which are similar to
those achieved by a debtor-in-possession procedure
under Chapter 11 of the US Bankruptcy Code, typically
involving debt for equity swaps and the dilution of
existing shareholdings along with a further injection
of funds. As a restructuring is a non-statutory remedy,
however, it is subject to certain limitations: there will
be no moratorium other than by agreement between
the creditors and there is no statutory mechanism by
which to compel a dissenting creditor to participate in
the restructuring.
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A number of different factors will affect the ability
of a company to negotiate a restructuring, the most
important of which will be (i) the viability of the
underlying business of the company (including its
ability to generate cash to service its debt), (ii) the
terms of its finance documents (including their event
of default provisions and thresholds for lenders’
consent) and, (iii) the identity of the lenders (and in
particular whether they are the company’s relationship
banks or a number of distressed-debt investors).
If a deal for a restructuring (such as a debt-for-equity
swap) can be reached, then it may be implemented
contractually. However, if the relevant finance
documents impose a high consent threshold (for
instance, requiring 90 or 100 per cent of lenders to
agree to such a transaction), then the company may
propose a scheme of arrangement or CVA to compel
minority creditors to participate.
7.2 Is it possible to reorganise a debtor rather than
realise its assets and business?
A debt for equity swap is one of the most common
methods of reorganising a struggling company. It
involves the company’s lenders converting the debt
owed to them into one or more classes of the debtor’s
share capital. This conversion is often undertaken in
conjunction with other recapitalisation strategies
by the company, such as issuing further shares or
attracting a strategic investor. There is no prescribed
format for a debt for equity swap and details of the
rights and restrictions attached to the lenders’ shares
will depend on a large number of different factors.
Nonetheless, it is common for the shares issued to
the lenders to be a mixture of ordinary shares, and
preference shares which will rank ahead in priority
over the company’s ordinary shareholders. However,
as outlined in section 7.1, whether a debt for equity
swap is possible will depend on the terms of the
finance documents and the level of consent required
from lenders. In circumstances where the requisite
proportion of lenders do not agree to a debt for
equity swap, a CVA or scheme of arrangement may
be necessary to implement the transaction. A prepackaged administration sale of the business, under
which not all the company’s liabilities are transferred
to the new owner, may also be considered.
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7.3 Is it possible to achieve an expedited
restructuring of the debtor by means of a
pre‑packaged sale? How is such a sale effected?
In a pre-packaged sale (“pre-pack”), a company is
put into administration and then immediately sold
pursuant to a sale agreement which was arranged
before the administrator was appointed.
Pre-packs are intended to salvage a company’s
business where the company is insolvent but its
business is viable. The company’s directors, assisted
by an insolvency practitioner and, on occasion, an
investment bank, first prepare a detailed assessment
of the company, its financial condition and the
marketplace. The aim of this exercise is to assist with
the valuation of the business: insolvency practitioners
who are involved in pre-packs are typically concerned
to ensure that the valuation placed on the business
that is sold is equivalent to the business’ market
value. This is because, unlike the course of a typical
administration, creditors are not given the opportunity
to vote upon and approve a pre-packaged sale. Given
this, the administrator is vulnerable to claims that
he failed to achieve the best value possible for all
the company’s creditors. The valuation exercise for
a pre‑pack may be done by means of a marketing
exercise.
The prospective purchaser may be an unconnected
third party, or may be a new company (“Newco”)
which is specially incorporated and capitalised so that
it may purchase the company’s assets. Newco may be
owned either by the company’s existing lenders (if they
are seeking to convert their holding of the company’s
debt into ownership of the company’s business) or
may be owned by the existing owners or directors
of the company. Where the company has granted
security over its assets, the consent of the creditors
with the benefit of such security may also be required
in order to sell those assets.
Once a purchaser is found, the company is placed
into administration through the appointment of an
administrator (either by court application or through
an out of court appointment). Immediately after
the appointment, the administrator will execute the
business sale agreement, and the sale will complete on
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the same day. The proceeds of sale are then distributed
to the company’s creditors in accordance with normal
principles.
Pre-packs are not specifically provided for by English
insolvency legislation, but the Insolvency Service
issued a Statement of Practice in January 2009 (“SIP
16”) which contains guidance on best practice for
administrators involved in a pre-pack. SIP 16 aims
to improve the level of disclosure provided by the
administrator to the company’s creditors so that
their interests may be better protected. A revised
Insolvency Code of Ethics was also issued in January
2009 and includes additional professional guidance for
administrators in the context of a pre-pack.
8. International
8.1 What would be the approach in England and
Wales to recognising a procedure started in
another jurisdiction?
There are four mains sources of cross-border
insolvency law in England and Wales: the EC
Regulation on Insolvency Proceedings (the “EC
Regulation”), the UNCITRAL Model Law on CrossBorder Insolvency (the “Model Law”), the Insolvency
Act 1986 and case law.
The EC Regulation
Insolvency Proceedings opened in an EU Member State
under the EC Regulation must be recognised without
any formality in all member states, including England
and Wales, from the time the judgment opening the
proceedings becomes effective in the member state in
which the proceedings are opened.
The Model Law
The Cross-Border Insolvency Regulations 2006 (the
“Regulations”) enacted the Model Law into the law of
England and Wales on 4 April 2006. The Regulations
provide for the recognition of a foreign proceeding
commenced in any foreign country, in most cases
whether or not that foreign country has enacted a
version of the Model Law.
Insolvency Act 1986 (the “Act”)
Section 426 of the Act provides for co-operation
between jurisdictions within the United Kingdom and
also co-operation between the United Kingdom and
other designated jurisdictions, which mainly include
Commonwealth countries. Where Section 426 of
the Act applies, it provides an alternative means of
relief and assistance to the Model Law. It is likely that
the countries or territories that have the benefit of
Section 426 of the Act will continue to use it until
there is sufficient certainty about the operation of
the recognition proceedings under the Regulations
and where it confers greater advantages than the
Regulations.
Case law
In circumstances where the EC Regulation, the Model
Law and Section 426 of the Act are not applicable,
recognition of foreign proceedings by the English courts
will depend on common law principles developed by the
courts. The English courts have an inherent jurisdiction
to co-operate with foreign insolvency representatives
and recognise foreign proceedings.
© Slaughter and May 2011
This material is for general information only and is not intended to provide legal advice.
For further information, please speak to your usual Slaughter and May contact.
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